Merchants who want to sell their products or services online need to provide a way for their customers to pay them. That requires an ecommerce payment processing system that can collect the transaction information, send it to the relevant banks and card issuers for verification and authorization, and then facilitate the transfer of money from the customer’s account to the merchant’s account.
For new small businesses or those who are just now adding an online sales channel to their business, the whole process can seem confusing and expensive. Learn more about how it works and how to manage your ecommerce payment processing costs below.
Understanding How eCommerce Payment Processors, Payment Gateways, and Merchant Accounts Work
Instead of a customer just handing you cash, an online payment has to go through a complex network involving a payment gateway, a processor, the customer’s bank, the merchant’s bank and, in the case of card payments, the card issuer.
To understand how all these pieces fit together, it helps to understand what each component of the system is doing. Here’s a quick breakdown of what each one does:
- Your payment gateway is the online portal where your customer inputs their payment information. Its sole purpose is to collect that information and encrypt it so that it can be securely passed along to the rest of the components in the system.
- Your payment processor is the middleman that connects with every bank, card issuer, and other component involved in the transaction. It receives the transaction information from the payment gateway, verifies that the customer has the funds, contacts the card issuer to authorize the transaction, and ultimately facilitates the movement of funds from the customer’s account to your merchant account.
- Your merchant account is where you receive the funds from any transactions. This merchant account acts as a holding account that can receive funds from those online payments and then release them to the merchant after a set holding period—usually one or two business days.
If you want to sell anything online, you will need all three of these in order to process payments. You can either get each one separately or look for a payment processing provider that offers their own payment gateway and helps you apply for a merchant account.
There are also payment processors, like Square or Stripe, that let you skip getting your own merchant account and instead use a shared merchant account through their platform. While that can make the setup process faster, merchants have less control over the funds and often experience sudden merchant account holds with little warning and long waiting periods before they can access their account again.
How to Set Up eCommerce Payment Processing for Your Small Business
As mentioned earlier, you will need a payment gateway, a payment processor, and a merchant account. Here’s what you need to know about getting each one.
Choose Your Payment Gateway
This is the piece that your customers will see so you want to keep them in mind when choosing a gateway. As an eCommerce business, you’ll mainly be choosing between three types: hosted, API hosted, or self-hosted.
A hosted payment gateway will redirect your customer to a third-party website to complete their payment. It’s secure and low-maintenance for merchants, but you’ll want to make sure you choose a well-recognized and trusted brand so that customers feel safe providing their payment information.
An API-hosted payment gateway is almost the same except that customers can input their information on a form that’s hosted on your website. Once the information is input, though, it’s still sent to the third-party payment gateway to be collected and encrypted.
A self-hosted payment gateway is completely contained on your website. Essentially, you would make your own payment gateway and be fully responsible for the security and setup. This is typically only done by larger businesses. API-hosted gateways are a good middle ground for smaller businesses.
Choose Your Payment Processor
To choose a payment processor, you want to look at their security measures, the variety of payment methods they accept, and what their fees are. Security needs to be your first consideration because, in order to be able to process credit cards, your payment processor needs to be PCI compliant.
Advanced security measures can also help reduce the number of chargebacks you have to deal with, saving you money on added fees and reducing your odds of being flagged as a high risk merchant. Next, you want to make sure they accept the payment methods your customers are most likely to use.
Finally, take a look at their fee schedules. The first thing you’ll want to check is whether they charge a flat fee or use interchange-plus pricing. Flat fees can seem easier to calculate, but interchange-plus pricing—which charges merchants the interchange fee plus an additional fixed fee for the service—can often end up being cheaper because merchants get to benefit from transactions that have lower interchange fees.
Regardless of how they set their fees, you’ll want to do the math to estimate how much you’ll likely be paying each month on transaction fees, monthly service fees, and any other fees the processor charges.
Apply for a Merchant Account
Merchant accounts are inherently risky for banks because any account that regularly receives payments runs the risk that some of those payments will result in chargebacks, which can carry hefty fines. So you’ll want to demonstrate a track record of processing transactions with few chargebacks and provide other documentation that reassures the bank that you’re a low risk merchant.
If you are classified as a high risk merchant, your best bet is to work with a payment processor who specializes in working with high risk merchants. National Processing, for example, can help high risk merchants open a merchant account. It works with a large network of banks and knows which ones are most likely to accept the kinds of high risk merchants that most other banks would deny.
Frequently Asked Questions About eCommerce Payment Processing
Here are answers to some of the most common questions merchants have about eCommerce payment processing.
Credit cards are, by far, the most popular online payment method, with Visa and MasterCard taking the lead as the most used cards. But more and more shoppers expect to have the option to use less common methods, like P2P payment apps or bank transfers.
Every eCommerce transaction starts with the customer inputting their payment information into the merchant’s payment gateway. That information, along with the details of the transaction, is sent to the payment processor which will then contact the customer’s bank, the merchant’s bank, and the card issuer to get the funds verified and the transaction authorized. Finally, the processor “settles” the transaction by facilitating the transfer of funds from the customer’s account to the merchant’s account.
Processing a payment happens very fast. The verification and authorization stage happens in a matter of seconds. While there might be a delay between authorization and settlement if the merchant opts to do batch settlement, the settlement stage is similarly fast. With that said, it can take 1-2 days before the funds become available to the merchant because merchant accounts often have a holding period.